The Exceptional US Performance: Drivers of Equity Returns
In Bridgewater research paper, the authors dive deeper into the latest US equity outperformance, the key drivers of equity returns, and the necessary elements for future outstanding performance.
The authors concluded that US companies are significantly better run, more innovative, better at capital deployment, have more shareholder-friendly structures (compared to the rest of the world), and the country has more favorable fiscal and government policies.
US equity outperformance has been driven by a combination of factors (in rather equal proportions) and the outperformance happened in broad sectors (not only in tech):
🔹faster revenue growth (overall US economic outperformance)
🔹bigger margin expansion (more efficient capital deployment and favorable policies)
🔹increasing P/E multiples
“The above dynamics led to higher realized returns for investors in US equities because this earnings outperformance was not priced in at the start of the decade.”
The table below shows that many sectors in the US need to continue growing their earnings at 7% to achieve the same risk premium (developed equity markets outside the US need half as much).
Yet today, strong US earnings growth outperformance is already priced in, while many key drivers are hard to count on for future repeated results (e.g. globalization, tax cuts, significant fiscal support). Now, much relies upon the ability of the US tech sector / AI development to deliver a broad productivity boost across sectors for continued earnings growth.
Source: Bridgewater // #investing #stockmarket #stocks #markets
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